A man wearing a face mask walks past the U.S. Federal Reserve in Washington, DC, the United States, December 2, 2020.
Liu Jie | Xinhua News Agency | Getty Images
The US Federal Reserve will not intervene anytime soon to temper rising inflation, market watchers have said, despite the surge in yields that rocked global stock markets.
Stocks have been linked over the past week to rising Treasury yields and the possibility that the Fed will tighten monetary policy to deal with an expected rise in inflation.
On Thursday, Fed Chairman Jerome Powell acknowledged that “some upward pressure on prices” could occur as the economy reopens, noting that he expects the central bank or “patient” on political action even if the economy sees “transitory increases in inflation”.
Although the Fed has consistently been committed to maintaining its accommodative monetary policy and employment and inflation are still well below target, Powell’s comments have lowered the benchmark yield of the US Treasury to 10 years at- above 1.5% and rocked the global stock markets. That return hit an intraday high of 1.626% on Friday after a strong jobs report.
“The bond market vigilantes can shout whatever they want, but for now the Fed has no intention of twisting. Maybe that will change if bond markets get messy enough to trigger a widening credit spreads, but not yet. ” Kit Juckes, global head of foreign exchange strategy at Societe Generale, said in a research note.
Perhaps the failure to give in to the vagaries of the stock market, held hostage by every swing in risk sentiment, reflects an awareness of the big picture – overvalued stock markets are more dangerous than Slightly higher bond yields, ”he said.
The Fed has referred to contingent forward forecasts and pledged to consider the underlying data as it seeks to pull the economy out of the coronavirus crisis.
“Their projections for the economy suggest that inflation, after surging this year, will fall back to the target in 2022, and that the labor market must be very hot in a more general way than we have seen in the report. past for them to start policy tightening, ”said Francesco Garzarelli, head of macro research at Eisler Capital.
Garzarelli told CNBC’s “Street Signs Europe” on Friday that the steepening of the yield curve was in line with the Fed’s current framework of adjusting to incoming data rather than operating according to plan, especially taking into account positive news on vaccinations and fiscal stimulus.
“What stops it, I think, here the Fed wants to have full control over the front end of the curve and I think that could come out if the situation gets very rowdy by stepping up its guidance at the front end.” he said, adding that the central bank was unlikely to change the long end of the curve. The front end of the curve refers to short-term debt securities, rather than longer-term bonds.
Powell stressed Thursday that the rise in bond yields and the adverse market reaction were not viewed by the central bank as “disorderly” requiring direct intervention.
Charalambos Pissouros, senior market analyst at JFD Bank, also noted the Fed’s willingness to exceed its 2% inflation target for several months in the short term with the hope of stabilizing in the longer term.
“As a result, we expect fears about high inflation to subside for the foreseeable future, which could allow stocks and other risk-related assets to rebound,” he said in a note on Friday. .
“As for the dollar, it could be the subject of short interest on more signs that the Fed is likely to stay dovish longer than expected.”
Meanwhile, James Morton of Santa Lucia Asset Management believes the Fed is likely to change its policy in the near term if inflation and yields continue to rise.
“The US government is the biggest debtor after all and it cannot afford higher interest rates,” Morton told CNBC’s “Capital Connection” Friday.